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“Be on the Lookout” Lists Gone From IRS Reviews of Sec. 501(c)(4) Applications

Two
years after finding the IRS used inappropriate criteria when
reviewing applications for tax-exempt status under Sec.
501(c)(4) and delayed the processing of some applications—a
report that led to congressional investigations and the
resignation of IRS Exempt Organizations Director Lois Lerner—the
Treasury Inspector General for Tax Administration (TIGTA) on
Thursday issued a follow-up report to check on the IRS’s
progress in eliminating the controversial practices (TIGTA Rep’t No. 2015-10-025).

In
the earlier audit, TIGTA said it had found
that ineffective management resulted in (1) the use of
inappropriate criteria to identify for review organizations
applying for tax-exempt status based on names and policy
positions (so-called be on the lookout lists) instead of
indications of political campaign intervention; (2) substantial
delays in the processing of certain applications; and (3) the
issuance of “unnecessary information requests.”

In its
new report, TIGTA found that the IRS has eliminated its use of
the “be on the lookout” lists and similarly inappropriate
criteria for identifying political activity when reviewing
applications for exempt status. It interviewed a random sample
of IRS Exempt Organization (EO) employees who confirmed the
lists are no longer used.

The second issue in the earlier
report was the length of time it took the IRS to process
applications for 501(c)(4) exemptions. According to the earlier
audit, as of Dec. 17, 2012, 160 applications had been pending
for inordinate lengths of time. To deal with these delays, the
IRS introduced an optional expedited process where the
organizations certify that they meet the criteria to be a Sec.
501(c)(4) social welfare organization. This process is not
available for other organizations, such as labor unions and
business leagues. TIGTA said that as of Dec. 4, 2014, 149 of
those 160 cases had been closed.

In response to the
third complaint, the IRS has developed preapproved questions to
be used and has a review process to be sure unnecessary requests
for information are not sent to applicants.

TIGTA made
two new recommendations in its latest report, both of which the
IRS agreed with. The first recommendation was to improve the
timing and execution of further training of EO staff members,
and the second was to expand the expedited review process to
other organizations (labor unions and business leagues) if the
IRS makes it a permanent program.

With all the recent tax law changes, this year it’s more important than ever to make sure your clients’ tax situations are squared away before year end. This report provides necessary guidance to ensure 2019 starts without a hitch.

Don’t get lost in the fog of legislative changes, developing tax issues, and newly evolving tax planning strategies. Tax Section membership will help you stay up to date and make your practice more efficient.